3 Top Tips for Mitigating Outsourcing Risk

Manufacturers say they worry about supply chain risk, but often there's a gap between the level of concern and on-the-ground planning.

For example, Travelers 2015 Business Risk Index found that nearly half (47%) of manufacturers worried about supply chain risks. In fact, at least half were concerned that they might not be able to get materials from suppliers (51%) or might be unable to get products to customers or end users (50%).  At the same time, less than a third (32%) reported that they had developed an incident response plan.

Ken Katz, property risk control director at Travelers Insurance , explained some of the reasons to EBN in an interview:

I think supply chain risk is on everybody's mind. A lot of times, when something such as a process or operation, isn't without your four walls, there's a tendency to pay a little bit less attention to it. It's out of sight, out of mind, and everyone assumes that someone else is doing it. The risk certainly goes up then. the tendency to subcontract out anything except core competencies has core competencies has good reasons for it, but once you do that someone else is now supplying you. You have to do due diligence to make sure that reliable strategies are in place.

OEMs need to make sure to follow best practices around mitigating risks created by outsourcing. Katz offered a few pieces of advice:

  1. Choose carefully between single source and multiple sources. “You have to have the right strategy since you are betting your business on it,” said Katz. “There are lots of good reasons for a single supplier from maximizing the relationship to capture economies of scale. But you are also then beholding to that one company.” Focus limited resources on the products that would have the biggest business impact in case of supplier failure. Do due diligence and don't assume that your potential supplier applies the same level of scrutiny on their suppliers. Ask those questions. “Certainly, with things like electronics especially, you want to scrutinize to make sure it makes sense from enterprise risk management standpoint,” said Katz. “The electronics industry in particular grapples with short product life cycles, fierce competition, and unpredictable demand. It's a challenging environment.” In addition, OEMs face huge inventory challenges and changing prices. All of these elements make choosing the right supplier more critical than ever.
  2. Create a business continuity plan that includes the supply chain. A strong business continuity plan can prove to be a substantial business advantage in the face of a big event—so make sure to cultivate support from top management. “Focus on ensuring that supply chain and operations will be resilient if and when you have an event,” said Katz. Further, organizations need to regularly update and test their plan. “The human element is often a spot where you have gaps,” said Katz. “You need to test the plan and validate your assumptions. It has to be part of your regular way of doing business. If something happens, your plan is only going to be as good as you can execute it.”
  3. Focus on safeguarding intellectual property (IP). IP is an often-overlooked element of corporate assets, so organizations need to focus on maintaining control over that type of information, including product designs and customer lists. “You need to put strong controls there,” said Katz. “What's the legal risk in the country where you are doing business? Are you going to own the equipment or let others? How do you manage it?” In some cases, keeping certain key capabilities or designs in house may be warranted.

Let us know your experience with risk created by outside suppliers and how you've managed it in the comments section below.

— Hailey Lynne McKeefry, Editor in Chief, EBN Circle me on Google+ Follow me on Twitter Visit my LinkedIn page Friend me on Facebook

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